OPEN A SEPARATE SAVINGS ACCOUNT , AND DON ’ T TOUCH IT Investing in real estate typically involves coming up with thousands of dollars . If you need to save a significant amount of money , open a separate savings account where you can make deposits toward your goal . Set up automatic deposits from your wages , and don ’ t touch it . Give your Savings account a name that excites you . Be committed to depositing regularly . Create a visual of your dream , such as a photograph , magazine cut-out or vision board that you can refer to when your motivation for saving wanes .
The benefits of a separate savings account that you commit to are : you can see your savings grow ; you won ’ t be tempted to spend the money because it will be totally separate from your checking or other savings accounts ; and best of all , even if you decide a new home isn ’ t affordable , you will have accumulated a healthy nest egg .
Just how much should you aim to deposit into your Savings Account ? Go back to the online calculator you used to estimate your mortgage , taxes and average monthly bills . Compare this amount to your current payments . The difference between your current bills and the projected expense is your savings goal .
For example , if your current mortgage is $ 2,000 per month and your new dream home will have expenses of $ 3,000 per month ( including taxes , insurance , the costs of homeownership , and regular bills like utilities ) you will need to make a monthly savings deposit of $ 1000 per month . Your ability to regularly make that payment to your savings account will pretty quickly indicate whether it is affordable .
If you need to save for a down payment , calculate that number . Then establish a goal for when you would like to buy the property . Divide the time into months and you will know how much you need to save . If you need $ 48,000 for your down payment and you want to purchase a new home in the next two years , you will need to save an average of $ 2,000 per month .
By adding the cost of the down payment and the costs of home ownership , you will know if you dream is affordable . Consequently , you will at the same time have a plan to achieve your goal .
MAKE A BUDGET AND A PLAN Another hurdle to saving for a new home or investment property might be your current expenditures . The fact for most people is that finding extra money after the monthly bills are paid might mean a major adjustment to lifestyle . But while some bills won ’ t change , others can . Go back to that image of the home or investment property you want . Create a budget , then look for expenses you might be able to cut in order to put that money in your savings account .
You might need to downgrade your smartphone data plan , move from cable television to the internet , eat out less , reduce your rent or mortgage by downsizing , finding a roommate or moving in with family , or commit to cutting all nonessential purchases . You might even need to ask for overtime or find a second job .
SAVE IN BULK Most people find that when they honestly commit to saving , there are many areas where they can pinch a penny . But be careful to save in bulk . While you might save 50 cents buying generic instead of gourmet , you need a lot of that change to get to your down payment . Instead , think about foregoing vacation , just for this year . Maybe repair your clothes , cars or other luxuries instead of buying new ones . Saving in bulk isn ’ t always easy , but your pot will grow much faster .
GOT A BONUS ? SAVE IT ! If you are the lucky recipient of a financial gift like a work bonus , pay raise or inheritance , take a large portion of it and put it in your savings account right away . The same principal applies to any funds you don ’ t typically receive . Setting aside surprise largesse is easy because you didn ’ t expect it in the first place and prudent , when it can be a large deposit to your savings .
RETHINK YOUR RETIREMENT 401k matches from your employer usually cap at 6 %, so you may want to consider putting any funds above that number into your savings account instead of into your retirement . Keep in mind that just like a retirement plan , a house is an asset . If you buy smart and build equity , you are still investing and saving , just in a different way . Once you have the money you need , you can resume investing in your retirement funds .
Borrowing from your 401K or IRA to fund your down payment should not be the first avenue you explore as you search for funding . Not only do you have to pay yourself back , which will be another monthly expense , but also you are reducing the amount of principle you could have otherwise been using to generate growth .
USE THE BUDDY SYSTEM The fact is that you build savings by spending less than you earn . Saving begins and ends with making a budget and sticking to it . Much like a diet , this is not easy . Sometimes you need a little support from a buddy . Find a friend or relative to support you when saving gets tough . Talk to family members who encourage you to spend about your situation and ask them to be sensitive to your savings goals . If your best pal asks you out to the bar most nights , chances are you will be drinking away your dream . If your girlfriends spend weekends shopping , you might find you have a lot of shoes , but no home to house them . A budget buddy could be the support that makes or breaks your savings plan .
FINAL THOUGHTS Saving for a first home , or even for another home , might seem impossible . The only person who can control your finances is you : see where you can adjust your current income and expenses , be honest about how you manage your finances , and save both regularly and as you experience financial windfalls . The fact is that you will probably find a great sense of pride and motivation in watching your savings account grow as you remain financially accountable and fiscally conservative . You might be surprised at how quickly your savings can grow , and how quickly your real estate dreams can come true .
GREENBOOK | SPRING 2017 9